Letters

Model Shadow Stock Portfolio Rules

There should be more details on entry points for new members who are starting to build their portfolio. Since the changes are made quarterly, any entry and exit prices would be useful.

—Priya Balakrishnan from Texas

Charles Rotblut responds:

The buy and sell rules for the portfolio focus on valuation, market capitalization size and profitability, not price action. If a stock’s price rises from the purchase price, but the stock otherwise meets the buy criteria for the portfolio (including the buy and sell rules), it is considered to be “qualified” for purchase.

This said, we do maintain a detailed list of the portfolio’s transactions for those members who are interested in seeing them. Select Transaction History on the right side of the Model Shadow Stock Portfolio page at www.aaii.com/model-portfolios/stock and look for the link to the detailed version.

Why the rule: “No financial stocks or limited partnerships wil

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—Jim Peabody from Vermont

James Cloonan responds:

There is nothing wrong with financial stocks or partnerships. The problem is that the process used for selecting stocks in the portfolio doesn’t work for financial stocks or partnerships because their balance sheets are different. This is true of most value-oriented portfolios. They ignore financial stocks and partnerships. We have not found a time-proven method for choosing the best financial stocks.

There is no question that it will be hard to replicate the published performance of the Model Shadow Stock Portfolio exactly due to “pop” that new additions receive as followers of the strategy take positions. However, if you believe that the research points to a longer fundamental uptrend for the Model Shadow Stock Portfolio holdings, you should still do well. Even though AAII members undoubtedly drive up these stocks short term, I have to believe that we have relatively little long-term impact on the valuation of these companies; that comes from long-term positive performance of the companies’ businesses and the accumulation of the stock by other investors over time.

Yield vs. Current Yield

I truly applaud you for the reasoned research that went into this article. I have copied it out to my collection of materials on income investing in general.

One thought: If you take the word “current” out of “current yield,” then a certain type of dividend growth investing (with a concentration on the growth part) would result in a higher income each year one held the asset. Thus, the income goes up, and really, most income-oriented investors would be OK with this. The catch is that they have to start with 3% yields, and work higher over time. If someone has the time, then this is a way to reach for yield, but not “current” yield.

Recalculate During Retirement

A big shortfall of this and many more articles is the lack of an example from which the reader can calibrate what they think the author is trying to say.

Every constant $$$ payout, be it Social Security, fixed pensions or constant withdrawal amounts, has a Taleb function (a Black Swan) that can make it blow up. From my nearly 20 years of retirement, with all the blowups in the market one needs to assume that every few years they are re-retiring and should recalculate their actual money situation. This more intelligently keeps their spending under control than using a cost-of-living number.

—Hal Marrett from New York

Discussion

Harry Ohlson from CA posted about 1 year ago:

Safe Withdrawal Rates etc.
Another consideration that I have not seen addressed is the effect of Minimum Required Distributions in portfolios that have substantial tax-deferred assets. As the retiree
grows older, withdrawals soon exceed the 4%
level and total taxable income increases significantly in succeeding years. The higher tax bracket results in a lower total portfolio value. The assumptions and projections no longer hold true.

E M Easterly from OR posted about 1 year ago:

Yes, Mr. Ohison, RMD's steadily increase as we age and hence our taxable annual income increases. But taxes on current income have no impact upon the current value of the portion of our portfolio subject to the required distribution formula. Indeed, as long as the annual RMD is less than the return on the portfolio the portfolio will grow.

As Mr. Marrett suggested in his comment it behooves all of us to routinely review our retirement assets and spend accordingly. To the extent you are suggesting a set annual percentage withdrawal amount from invested assets cannot be set in stone I agree. Most certainly withdrawal rates need to be modified to reflect individual portfolio and spending habits. And while RMD withdrawal rates can impact annual tax liabilities those tax rates have absolutely no impact of value of the portfolio subject to RMD's.

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